LEGAL RULING 96-2

June 11, 1996

SUBJECT: APPLICATION
OF NONADMITTED INSURANCE TAX LAW TO GOVERNMENTAL AND QUASI-GOVERNMENTAL ENTITIES

ISSUE

Is
a governmental entity or quasi-governmental entity which effects insurance with
a nonadmitted insurer liable for the tax imposed by Part 7.5 of Division 2
of the Revenue and Taxation Code (the Nonadmitted Insurance Tax Law)?

FACTS

Situation
1. A county or an incorporated city in the state of California (a "governmental
entity") is considering directly placing insurance orders for liability protection
with an insurance provider that lacks sufficient nexus with California to be subject
to the California Department of Insurance's regulatory oversight ("nonadmitted
insurance company"), rather than utilizing a surplus line broker to secure
insurance coverage. The governmental entity will negotiate and effect the liability
insurance on its own behalf with the nonadmitted insurer.

Situation
2. A quasi-governmental entity which is a regional transit authority organized
by local governments is considering directly placing insurance orders for liability
protection with a nonadmitted insurance company, rather than utilizing a surplus
line broker to secure insurance coverage. The quasi-governmental entity will negotiate
and effect the liability insurance on its own behalf with the nonadmitted insurer.

LAW AND ANALYSIS

Insurance Code
("Ins. Code") § 1760 provides in full:

(a) Any person may negotiate and effect insurance to protect himself, herself,
or itself against loss, damage, or liability with any nonadmitted insurer.

(b)
Every person that effects insurance governed by this chapter shall pay the tax
imposed by Part 7.5 (commencing with Section 13201) of Division 2 of the
Revenue and Taxation Code.

For
gross premiums paid or to be paid on insurance contracts that take effect or are
renewed on or after January 1, 1994, every person who effects insurance governed
by Chapter 6 (commencing with Section 1760) of Part 2 of Division 1 of the
Insurance Code shall pay a gross premium tax of 3 percent for the use of the state
. . . ."

The
1993 changes to Ins. Code § 1760 enlarged the population of insureds who
could contract with nonadmitted insurers for insurance coverage. Rather than limiting
insurance coverage and negotiation to individuals, Ins. Code § 1760 was amended
to allow additional parties, such as corporate entities, to directly place insurance
with nonadmitted insurers.

A governmental entity or quasi-governmental
entity cannot, by definition, be a citizen of this State. Its ability to effect
insurance with a nonadmitted insurer, pursuant to the authorization set forth
in Ins. Code § 1760, is contingent upon its classification as a person for
purposes of Ins. Code § 1760, although no judicial opinion has confirmed
this principle. In order to directly effect insurance with a nonadmitted insurer,
a governmental entity or quasi-governmental entity must be classified as one or
more of the following terms: an association, organization, partnership, business
trust, or corporation. While a governmental entity might, for example, be more
properly classified as an association, municipal corporation, or organization,
depending upon particular facts and circumstances, it must ultimately fall within
the definition of a "person" to have the right to effect and negotiate
insurance with a nonadmitted insurer.

In conjunction with
the expansion of persons who could negotiate with a nonadmitted insurer was the
imposition of tax on those same persons effecting insurance with a nonadmitted
insurer. Ins. Code § 1760(b) provides that "[e]very person that effects
insurance governed by this chapter [i.e. insurance effected with a nonadmitted
insurer] shall pay the tax imposed by Part 7.5 . . . of the Revenue and Taxation
Code [the Nonadmitted Insurance Tax Law]." (Emphasis and bracketed items
added.).

Any entity or party relying on the Insurance Code's
definition of person for the right to effect insurance with a nonadmitted insurer
under Ins. Code § 1760(a) necessarily must use that same definition of person
with respect to liability for the Nonadmitted Insurance Tax under Ins. Code § 1760(b)
in order to give that statute a reasonable and consistent interpretation. Statutes
should be interpreted comprehensively, and each part or section should be construed
with the statute's general purpose and intent to produce a harmonious whole. Rodriguez
v. Superior Ct. (1993) 14 Cal.App. 4th 1260.

In addition
to the imposition of the Nonadmitted Insurance Tax Law provided by Ins. Code § 1760(b),
Rev. & Tax. Code § 13210(a), as set forth above, confirms that persons
effecting insurance with nonadmitted insurers are subject to the Nonadmitted Insurance
Tax Law, commencing with Rev. & Tax. Code § 13201. Rev. & Tax. Code
§ 13203, in defining the term "person" for purposes of Part 7.5
of the Revenue and Taxation Code, incorporates all of the terms found in Ins.
Code § 19, including association, corporation, and organization. As the Nonadmitted
Insurance Tax Law, as set forth in Part 7.5 of the Revenue and Taxation Code,
was enacted in the same bill (SB 625) giving rise to the changes to Ins. Code
§ 1760, and the relevant Insurance Code and Revenue and Taxation Code sections
cross-reference one another, it is proper to read the provisions of SB 625
together when determining application of the Nonadmitted Insurance Tax. A statute
must be construed in the context of the entire statutory scheme of which it is
a part, in order to achieve harmony among its parts. This principle applies even
though the two provisions are in separate codes. O'Brien v. Dudenhoeffer (1993)
16 Cal.App.4th 327.

As the definition of "person"
for purposes of Part 7.5 of the Revenue and Taxation Code shares the same terms
found in Ins. Code § 1760, based on the interrelationship between the two
provisions and their joint enactment, it is appropriate to harmonize their application.
As a governmental entity or quasi-governmental entity would necessarily fall within
the Insurance Code's definition of person in order to effect its own insurance
with a nonadmitted insurer, and would then be subject to the Nonadmitted Insurance
Tax, as set forth in Ins. Code § 1760(b), a governmental entity or quasi-governmental
entity must also be considered a person for purposes of Part 7.5 of the Revenue
and Taxation Code in order to reconcile the application of the tax provided in
Ins. Code § 1760(b).

In addition, imposition of the
Nonadmitted Insurance Tax Law was brought about in part to equalize the competitive
advantage between admitted insurers and nonadmitted insurers. To further the policy
of fair competition between admitted and nonadmitted insurers, it is appropriate
to consider a governmental entity or quasi-governmental entity a person for purposes
of the Nonadmitted Insurance Tax Law in order to prevent nonadmitted insurers
from securing an economic advantage over admitted insurers.

HOLDING

A governmental entity or quasi-governmental entity effecting
insurance with a nonadmitted insurer is liable for the tax imposed by Part 7.5
(commencing with Section 13201) of Division 2 of the Revenue and Taxation Code.